Friday, September 26, 2008

Fortunately, it appears that the House GOP is going to scuttle Paulson's plan that would have the government buy $700 Billion worth of bad mortgages from banks and hold them. Unfortunately, their plan to create a government sponsored insurance program under which banks would pay premiums to the Treasury for this insurance isn't much better.

The real explanation of what has happened and a permanent solution is offered here by Dr. Reisman. This should be required reading for anyone concerned with the current crisis.

Short of such a radical plan, anything the government does in the direction of liberating the economy should be supported and anything that increases the role of government should be opposed. Abolishing the Federal Reserve Bank and returning to a gold standard, massively cutting the government budget deficit with corresponding reductions in income taxes, eliminating capital gains taxes on investment gains and especially on home sales, eliminating all goverment agency backing for mortgage backed securities, removing regulations that prevent or impede bank mergers and acquisitions, would be incredibly bullish developments with the result of creating confidence and encouraging capital investment in the American economy.

Unfortunately, the politicians in both parties will take the path of least resistance, i.e., they will grasp at policies that may appear to be beneficial in the short run at the expense of the long run. Creating money out of thin air to buy bad mortgages may be temporarily beneficial to those who sell the mortgages to the Treasury (and their investors), however, such a scheme does nothing permanently to change the system that caused this crisis (credit expansion caused by the government coupled with government backing of mortgage securities) and in fact exacerbates the problem long term by inflating the money supply again. I'm prepared for the worst.

Wednesday, September 24, 2008

The FBI has four major US financial institutions in its crosshairs for triggering the potential collapse of Wall Street and the need for a $700 billion federal bailout plan, law-enforcement officials said yesterday.

Citing potential fraud charges, the feds are probing mortgage-finance giants Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc., and insurer American International Group Inc., which last night signed papers making its $85 billion federal loan official.

So apparently the United States government is now investigating these companies for possible fraud. Ironically, the biggest fraud ever perpetrated is the creation of the Federal Reserve Bank. Essentially, the Federal Reserve Bank (formed in 1913) was authorized to print federal reserve notes (the paper dollars we use) that were originally fully redeemable for gold. Once the government had the nations' gold in its possession (in exchange for these notes) , FDR outlawed the private holding and import of gold in 1933. The notes were still redeemable in gold but only foreign central banks were able to do so. In 1971, Nixon stopped even this limited practice and the gold standard was officially abolished. So in a 60 year span, the United States government expropriated the nation's gold supply.

Of course, the Federal Reserve Bank buys US Treasury debt which it pays for with fake money that it creates. This is the mechanism by which the government can infinitely deficit spend and by which it inflates the money supply. This process is the root cause of the boom bust cycle and the fundamental economic cause of what we are experiencing (along with the further fraud perpetrated by the government by first forcing banks to lend to low quality buyers and then tacitly backing mortgage backed securities through federally "sponsored" agencies like Fannie and Freddie as well as offering deposit insurance with funds it does not have). The origination of this system and the destruction it has wrought is one of the most heinous crimes imaginable so if the FBI wants to investigate fraud it should walk down the street to the Federal Reserve and the Congress which authorized this unconstitutional expropriation of private gold and the issuance of fiat money.

Incidentally, if you wish to study the economic effects of inflation further, I highly recommend Chapter 9, of Capitalism: A Treatise on Economics by Dr. George Reisman. A fully downloadable and searchable version of the book appears on the author's site and can be downloaded by clicking this link. Dr. Reisman elucidates the destructive effects of inflation including using examples that sound like they were taken out of today's newspaper although the book was written over 20 years ago. For example, he illustrates how a credit crunch can form as a result of inflationary price increases in real estate. I'm not kidding although I wish I was. He also explains how a 100% gold reserve standard could immediately put an end to this crisis, stop inflation, and return the banking system to rationality and solvency.

Tuesday, September 23, 2008

Mark wrote the following comment after my last post and I thought the subject deserves its own post:

many argue that the American government has spent more money on 'socialism for the wealthy' than entitlements for the poor- I wish I could sell worthless goods (bad mortgages, etc.) knowing that the American taxpayer will bail me out. It is important to point out that the function of government should not be to redistribute wealth, but you seem to focus on non-businessmen at the expense of where a huge portion of redistribution is actually directed. Also keep in mind that JP Morgan and other successful bankers played a large role in the creation of the Federal Reserve Act... the real monster in our arbitrary monetary system. Businessmen are not always 'forced' to protect themselves from government force. At times, they are leaders in its expansion. The forces that contribute to the expansion of government power are varied and diverse.

Note the following passage in my previous post:

"Because capitalism entails a wall of separation between economy and state, their path to power is cut off. In a capitalist society, no businessmen or lobbyists would be skulking around Washington in search of favorable government interventions—whether subsidies for themselves or shackles for their competitors—because the government could not intervene in economic affairs."

I couldn't agree more with your point that it is usually corrupt businessmen that seek favors and handouts from the state. In fact, in Ayn Rand's magnum opus, Atlas Shrugged, the main villains were not the "proletariat" but businessmen such as Orren Boyle and James Taggart who sought favors and handouts from their cronies in Washington. Another recent example is the usage of the anti-trust statutes by Microsoft's competitors to force the company to act against its own interests. But, of course, there are hundreds of examples, but such examples are not instances of capitalism but its antithesis.

It is a common misconception that "capitalism" somehow means state intervention on behalf of business. (I believe this misconception derives from the historical fact that in America the state has constantly intervened in business and America is most associated with the concept of "capitalism".) It is vital that those who advocate capitalism understand that a free market means separation of economics and state and that the government's function would be only to protect individual rights. If the government were prevented constitutionally from intervening in business then no one, including businesses, could use the state to grant it special favors. Today, the state has the power of life and death over every business in every industry. Under this system, businesses must legitimately lobby (bribe) politicians in order to protect themselves. Naturally, in such an environment, unscrupulous businesses will attempt to use this power to their advantage. Again, one of the arguments of the last post was that true capitalism (government limited to protecting rights) would deny the ability for would-be crooks to use the state in this way.

My last point is that the question of who uses government force (businessmen, artists, the poor, the handicapped, the third world, etc.) is not as critical as understanding why the state has been allowed to intervene. Whether it is businessmen seeking taxpayer subsidies or the homeless seeking welfare, the justification is always the same: "the common good." We are told that it is in the "public interest" to bailout corporations, build football stadiums for billionaire businessmen, inspect meat, subsidize artists, fly to mars, write social security checks to the elderly, build housing projects, provide aid to Africa, and on and on and on. In order to stop this, we must challenge the premises under which statists justify their intervention. The premise that must be challenged is the idea that it is necessary and moral for an individual to sacrifice for the so-called common good. We must replace this evil theory with the morality of rational self-interest, i.e., the idea that the purpose of an individuals life is his own happiness and that government's function is to protect rights which includes the right to own property and to trade with others. When a politician can publicly argue that social security and every government intervention that expropriates money from one group for the sake of another or that prevents individuals from freely entering contracts is not only impractical but immoral then we will win. When those who advocate for true capitalism take the moral high ground away from the statists, the advocates of capitalism and freedom will be considered "idealists" (instead of the Obama's of the world) and we will win.

Monday, September 22, 2008

Let me add, that the most important aspect of this latest fiasco is the attribution of its fundamental causes. The economics underlying this so-called crisis have been understood for at least 200 years - since the time of David Hume and Adam Smith. I have outlined the causes in detail in previous posts. This is not an economics problem. It is a moral and philosophical one. As Brook states:

These [various government interventions] are the real causes of the housing and financial crisis. But this fact, open to anyone who makes the effort to see, goes unnoticed because commentators, politicians, and policy makers know the popularly accepted “cause” in advance: the “greed” of banks, mortgage brokers, lenders, and borrowers—the “greed” that produced “market excesses.” The solution? Rein in the selfishness of these market participants with new government interventions and more government regulators. Thus the very cause of the housing mess—government interference in the market—is adopted as the solution, and the government’s power to dictate our economic decisions grows and grows.

This was the historical pattern of the 20th century. In every major economic crisis, the evidence implicating government interventions went unnoticed, and blame was laid instead at the feet of the market.

Everywhere, I read so-called experts laying the blame for this crisis on lack of regulation, free markets, greed, speculation, etc. The most important action we can take now is to expose the true culprit: government intervention in the economy based upon the heinous theory that sacrifice is the "good."

The root cause and ostensible justification for government intervention in the form of regulation and redistribution of wealth is the ethics of altruism. We are told that it is for the poor and helpless that we must enact welfare schemes and be our "brothers' keeper"- it is for the downtrodden third world that we must pour taxpayer money into foreign aid- it is for the "common good" that the government must fund science research, the arts, consumer protection, environmental laws, bail out investment bankers, etc. And when politicians do not want to raise the taxes necessary to pay for this largesse, they must borrow money. And, in order to not have to pay high interest rates they set up the absurdly evil "Federal Reserve" system and grant it the power to literally create money out of thin air with predictable long run consequences: the debasement of the currency, rising commodity prices, and a boom-bust business cycle as the pyramid scheme periodically crumbles. Meanwhile, pressure groups and lobbyists line the politicians pockets to secure their piece of the infinite government budget and to harness the coercive power of the state for their own benefit. However, instead of just opposing statism, we must stand for something positive. Quoting Brook:

It is true that capitalism unleashes selfishness. But Americans must learn what this actually means: Capitalism unleashes the thinkers and creators of the world. By protecting the individual’s right to life, liberty, property, and the pursuit of happiness, capitalism leaves each individual free to use his mind and produce goods. When you consider some of the giants of American industry—from John D. Rockefeller to JP Morgan to Henry Ford to Sam Walton to Bill Gates—two things stand out: the ideas these men originated and the novel products and business innovations they created. These men created products and services that improved our lives by orders of magnitude—and they were able to originate and produce such goods only to the extent that the government left them alone. Americans must come to realize that our quality of life stands in direct proportion to the freedom of industrialists and businessmen to act selfishly—and that the only way to defend such freedom is to recognize and uphold the morality of self-interest.

Americans must come to realize that we have nothing to fear from businessmen acting selfishly. On the contrary, we can only gain from their rational, productive efforts. We can learn from their example and profit from the opportunity to trade with them. Our unprecedented prosperity and standard of living exist not despite but because of these men. To shackle and tether such individuals with government regulations and interventions—to treat them as potential or actual Al Capones—is both unjust and self-destructive. Where would we be without our cars, medications, and computers?

Liars and cheats and crooks exist in every era and every culture, but under capitalism their opportunities diminish and their “lifestyles” become more difficult. Because capitalism entails a wall of separation between economy and state, their path to power is cut off. In a capitalist society, no businessmen or lobbyists would be skulking around Washington in search of favorable government interventions—whether subsidies for themselves or shackles for their competitors—because the government could not intervene in economic affairs. No politicians would be promising a new prescription drug benefit to be paid for by soaking the rich or by treating the middle class as beasts of burden, because the government would be constitutionally prohibited from “managing” the economy. Fewer business scandals on the order of WorldCom or Enron would arise, because unscrupulous businessmen would not stand a chance competing against fully free businessmen with long-range vision and integrity, men such as JP Morgan and Sam Walton (not to mention that in a capitalist system, actual crooks would be jailed).

Americans must come to understand that appeals to the “common good” and the “public interest” are not moral claims but licenses to evil. Because the American public is just a number of separate individuals, whenever some group trumpets action in the name of the “public interest”—say, a new prescription drug benefit or Social Security scheme—it is declaring that the wishes of some individuals trump the rights and interests of other individuals. But everyone has a moral right to pursue his own happiness, free from coercive interference by others. If it is to have a legitimate meaning, the “public interest” can mean only this: The rights of each and every individual are equally protected by the government.

If Americans want to turn permanently toward a genuinely free market—and thus toward peak prosperity—they will have to reconsider their moral convictions. They will have to discover a new morality, one based on the requirements of human life and backed by detailed arguments and demonstrable facts. This is what Ayn Rand offers in her body of writings. She is the only champion of capitalism who would and could defend capitalism on moral grounds, as indicated by the radical titles of her books Capitalism: The Unknown Ideal and The Virtue of Selfishness. Those who want to fight the trend toward statism—those who want to effect a real and lasting turn toward capitalism—would do well to study her thought.

To paraphrase Ayn Rand, what America needs now is not to return to capitalism but to discover it.

The threat of global warming is so great that campaigners were justified in causing more than £35,000 worth of damage to a coal-fired power station, a jury decided yesterday. In a verdict that will have shocked ministers and energy companies the jury at Maidstone Crown Court cleared six Greenpeace activists of criminal damage.

Jurors accepted defence arguments that the six had a "lawful excuse" to damage property at Kingsnorth power station in Kent to prevent even greater damage caused by climate change. The defence of "lawful excuse" under the Criminal Damage Act 1971 allows damage to be caused to property to prevent even greater damage – such as breaking down the door of a burning house to tackle a fire.

This means that environmentalists in Britain are legally free to destroy any property that can be construed to contribute to alleged global warming. So, if they can legally destroy a coal plant, doesn't that imply that it is legal to destroy automobiles , automobile factories, airplanes, airports, gas stations and refineries? Human beings exhale CO2 so could this be a plausible defense for murder?

Meanwhile, as I have pointed out in past posts, there are many in the scientific community who continue to audaciously postulate that the sun might have something to do with temperature. Imagine that - the sun - c'mon? These scientists believe that we are entering a long period of global cooling. In fact, even the venerable Old Farmers Almanac is predicting cooling:

Based on the same time-honored, complex calculations it uses to predict weather, the Almanac hits the newsstands on Tuesday saying a study of solar activity and corresponding records on ocean temperatures and climate point to a cooler, not warmer, climate, for perhaps the next half century.

"We at the Almanac are among those who believe that sunspot cycles and their effects on oceans correlate with climate changes," writes meteorologist and climatologist Joseph D'Aleo. "Studying these and other factor suggests that cold, not warm, climate may be our future."

In the meantime, feel free to destroy or vandalize anything you think might be causing "global warming."

Thursday, September 11, 2008

Has anyone actually ever read the Bible? Below is my "quote of the week" from Leviticus 3:12-16:

'If his offering is a goat, he is to present it before the LORD. 13 He is to lay his hand on its head and slaughter it in front of the Tent of Meeting. Then Aaron's sons shall sprinkle its blood against the altar on all sides. 14 From what he offers he is to make this offering to the LORD by fire: all the fat that covers the inner parts or is connected to them, 15 both kidneys with the fat on them near the loins, and the covering of the liver, which he will remove with the kidneys. 16 The priest shall burn them on the altar as food, an offering made by fire, a pleasing aroma. All the fat is the LORD's.

Friday, September 5, 2008

As the 2008 presidential election nears, and while John McCain and Barack Obama struggle to distinguish themselves from each other in terms of particular promises and goals, it is instructive to observe that these candidates are indistinguishable in terms of fundamentals.

On the domestic front, McCain promises to “take on” the drug companies, as if those who produce and market the medicines that improve and save human lives must be fought; he promises to ration energy by means of a cap-and-trade scheme, as if the government has a moral or constitutional right to dictate how much energy a company may purchase or use; he promises to “battle” big oil, as if those who produce and deliver the lifeblood of civilization need to be defeated; he promises to “reform” Wall Street, as if those who finance the businesses that produce the goods and services on which our lives depend are thereby degenerate; he seeks to uphold the ban on drilling in ANWR, as if the government has a moral or constitutional right to prevent Americans from reshaping nature to suit their needs; and so on.

Obama promises to socialize health care (under the tired euphemism of “universal health care”), as if insurance companies, doctors, and patients have no right to use or dispose of their property or to contract with one another according to their own judgment; he promises to increase the minimum wage, as if employers and employees lack those same rights; he promises to pour taxpayer money into “alternative energy,” as if the government has a moral or constitutional right to confiscate money from productive citizens in order to subsidize tilting windmills; he promises to force oil companies to fund government handouts to Americans, as if the owners of oil companies have no right to their property or profits; he promises to bail out homeowners who cannot pay their mortgages, as if the government has a moral or constitutional right to make some people pay for the financial mistakes or hardships of others; he promises to “incentivize” students to do “community service” by offering them taxpayer-funded college tuition, as if the government has a moral or constitutional right to do so; and so on.

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“We are fast approaching the stage of the ultimate inversion: the stage where the government is free to do anything it pleases, while the citizens may act only by permission; which is the stage of the darkest periods of human history, the stage of rule by brute force.” -- Ayn Rand